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Spousal Maintenance Payers may lose Tax Deduction under new Tax Bill

According to new information recently released it’s proposed that Spousal Maintenance no longer be deductible from the Party paying it. This will certainly affect how Spousal Maintenance will be calculated and negotiated if this bill is passed.

Currently Spousal Maintenance, or Alimony, is considered as taxable income to the recipient and the payer does not pay income tax on it. This usually results in the Spousal Maintenance being taxed at a lower tax rate which means less money goes to the government and more money stays with the family.

If this bill passes it’s conceivable and probable that Spousal Maintenance awards will be smaller as the payer, or Obligor, has an increased burden and there is less money to go around. It’s unclear at this time how the Colorado Revised Statutes will be updated to reflect this new calculation and whether this change in taxable obligation will affect the Spousal Maintenance Calculator, or the Statutory terms currently used.

And Child Support will be affected too. If Spousal Maintenance is no longer considered “Income” it will be interesting to see how the Child Support calculations will handle Spousal Maintenance. If it’s still considered part of the Recipient’s adjusted gross income then child support should be minimally affected. If it’s not part of the Recipient’s AGI then the higher income party will have a much greater Child Support Obligation under the current statutory calculation.

It looks like this won’t affect anyone until 2019. Consult with your Tax Preparer so you stay alerted to any changes and considerations. Consult with a qualified Family Lawyer if you have specific questions about New divorce cases or cases modified that will be executed in 2019 where Spousal Maintenance, or Alimony, is concerned.

 

Here is the Excerpt for your review:

From

JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE, Page 100:

8. Repeal of deduction for alimony payments and corresponding inclusion in gross income (sec. 1309 of the House bill and secs. 61, 71, and 215 of the Code)

Present Law

Alimony and separate maintenance payments are deductible by the payor spouse and includible in income by the recipient spouse.231 Child support payments are not treated as alimony.232

House Bill

Under the House bill, alimony and separate maintenance payments are not deductible by the payor spouse. The House bill repeals the Code provisions that specify that alimony and separate maintenance payments are included in income. Thus, the intent of the provision is to follow the rule of the United States Supreme Court’s holding in Gould v. Gould,233 in which the Court held that such payments are not income to the recipient. Income used for alimony payments is taxed at the rates applicable to the payor spouse rather than the recipient spouse. The treatment of child support is not changed.

Effective date.−The provision is effective for any divorce or separation instrument executed after December 31, 2017, or for any divorce or separation instrument executed on or before December 31, 2017, and modified after that date, if the modification expressly provides that the amendments made by this section apply to such modification.

No provision.

Senate Amendment Conference Agreement

The conference agreement generally follows the House bill. However, the conference agreement delays the effective date of the provision by one year. Thus, the conference agreement is effective for any divorce or separation instrument executed after December 31, 2018, or for any divorce or separation instrument executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this section apply to such modification.

  1. 231  Secs. 215(a), 61(a)(8) and 71(a).
  2. 232  Sec. 71(c).
  3. 233  245 U.S. 151 (1917).

What are Client’s Best Interests?

Seems like an easy question on the surface.  When going through a divorce most of the clients that come before me basically want a fair financial settlement, a fair parenting plan with their children and to avoid being “screwed over” during the divorce process. These client needs are modest and I generally always can help produce an agreement that meets these requirements.

Impacts of Divorce

Divorce is difficult and troubling to the families involved but much of the damage that is possible can be prevented, in part, by properly handling the conflict in the most effective manner. Divorce is a stressful and very damaging process that leaves invisible wounds to all involved that can’t easily detected.